Are Rising Housing Starts Really Balancing Demand?

The latest data on building permits and housing starts released by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development on Tuesday brought some optimism to the market. The overall housing starts in May rose 5 percent to 1.35 million from 1.28 million in April 2018 and increased 20.3 percent year over year. After remaining flat in April, single-family housing starts also rose 3.9 percent to 936,000 from 901,000 in April 2018. More importantly, building completions for single-family homes rose 11 percent to 890,000 units in May from 802.000 in April.

Building permits too increased 8 percent year over year from 1.2 million in May 2017 to 1.3 million. Single-family authorizations, however, were 2.2 percent below their April numbers.

Greg Rand, CEO, OwnAmerica told MReport that the numbers were exactly where they should be. "It's not unusual to see housing starts rolling up on good gradual trajectories," Rand said. "The home building industry is, by nature of its business, a slightly lagging indicator since it takes time to acquire land, get permits, and build on that land. The industry has been growing at a good gradual trajectory since it hit bottom in 2010 and those numbers are being reflected now."

The positive starts and completion figures have also made the industry optimistic about finally closing the demand-supply gap in housing. "Although demand has outstripped supply since 2007, the gap seems to be narrowing," said Mark Fleming, Chief Economist, First American. "Nearly a million households were created between April 2017 and April 2018, adding to the demand for housing. However, the 873,000 new housing units completed are helping balance the demand."

Rand agreed, "The industry has been growing from the bottom quite steadily. The more units that are built, the more supply there is and as households are created and built we have equilibrium in the market."

"Single-family starts broke above 900,000 for the fourth time in the last seven months, reaching 936,000 a level surpassed only one other month since 2007," said Danielle Hale, Chief Economist at Realtor.com. However, she cautioned that while the news was encouraging, the market was still well short of where single-family starts should be. "A 'normal' level of single-family starts would be about 1.2 million," she said.

Builders though will be under pressure to increase the supply despite headwinds like rising costs of land, labor, and material. "May 2018 saw a 10.4 percent increase in completions compared to the previous year. As builders start to work on additional housing, we will inch closer to balancing inventory with demand," Fleming said. "But with millennials entering household formation age and baby boomers living longer and more independently, builders will remain under pressure to meet the growing demand."